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The coastal area of Chabahar in southern Iran is sparsely populated and has traditionally been associated with local steel production. The desert climate and remote location would make it seem an unlikely place to attract major foreign investment and interest from the world’s two most populous countries, but that is exactly what is happening. The city of 120,000, home to one of Iran’s seven free trade zones, has become a focal point for investment from India and a potential competitor for the hub of China-Pakistan Economic Corridor (CPEC), nearby Gwadar Port & Free Zone in Pakistan.

Times of India reported in July 2016 that India planned $500 million in investment to upgrade Chabahar Port on Iran’s southern coastal Makran strip. That is part of more than $3 billion which Chabahar has attracted in less than a year, since the United States and Iran reached an agreement to lift nuclear sanctions, creating the conditions for European and Asian investors to test the waters. The Financial Tribune reports that the majority of investment takes the form of a US “$2.1 billion agreement with Mohsin Haider Darwish LLC—an Omani holding active in a variety of fields, including engineering and construction—to build a 150-hectare logistics park” in Chabahar. Petrochemicals, steel, and maritime logistics are the primary industries being touted for investment. As Iran’s only Indian Ocean port, Chabahar offers natural advantages as a connection from East Asia to the Gulf, Central Asia, and East Africa.

Opening outward: An inability to engage in US dollar transactions, and lack of clarity about freezes on transactions between international and Iranian banks, dampened the investment outlook. However, over the past twelve months, Chinese, Indian, South Korean, Italian, French, Omani, Emirati, and other countries’ firms have all signed memoranda of understanding to do business in Iran’s free zones. That includes India’s $500 million planned investment in Chabahar Port and an adjacent Special Economic Zone (SEZ), as well as an agreement with China to build a joint industrial park focused on steel production.

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Iran’s president Hassan Rouhani and other advocates for the model hope these new FDI inflows will offset mounting criticism over the FTZs’ inability to boost the country’s exports. “An assessment of the performance of five of these zones that have been active for an average of 10 years shows exports from these regions have been three times less than imports,” the head of Iran’s Majlis’s (parliament’s) Special Economic Commission, Mohammad Reza Pour-Ebrahimi, was quoted as saying in January 2016 in the Financial Tribune. The Commission cited sanctions as a mitigating factor, but a failure to boost exports or build up Iran’s industrial base – the two primary motivations for the FTZ programme – could hamper Rouhani’s goal of expanding the model to other regions of Iran.

A broader context: For India, the strategic importance of Chabahar is immense. It allows Indian goods access to Central Asia and Afghanistan, bypassing antagonistic Pakistan, and also provides an economic counterbalance to China’s heavy investment in Gwadar Port and CPEC infrastructure. China is investing nearly US $50 billion in rail, highway, port, energy generation, and industrial parks along CPEC, and Gwadar is the fulcrum of the project. Pakistan’s Dawn news agency reported in January 2017 that final approval had been reached on a new special economic zone in Gwadar. Analyst Ali Malik of Pakistan’s Daily O expresses criticism of the SEZ and other CPEC investment, noting exorbitant loans from Chinese banks and a high debt-to-GDP ratio as potential signs of a “loss of sovereignty”. However, Pakistani officials have expressed optimism about the possibilities for employment, increased energy production, and increased exports to West Asia and Europe, and the Asian Development Bank has highlighted the potential for CPEC to introduce unprecedented levels of integration to the Asian economy.

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India clearly sees it as a development in its neighbourhood worth hedging against, and to that end is upgrading its own port infrastructure as well as investing in Chabahar. The Times of India reports that the Indian conglomerate Adani Group is spending $4 billion to build India’s first transshipment port, “to create a shipping hub rivaling Chinese facilities in the region.” The Indian government also announced the creation of a “reverse SEZ” in Chabahar (along with a similar facility in natural gas-rich Mozambique) to secure India’s long-term energy interests, taking advantage of reduced petrochemicals costs to establish Indian refineries, fertiliser plants, and other downstream industries to produce products destined for the Indian market. India and Afghanistan are also collaborating with Iran on the construction of a rail line connecting Chabahar to Afghanistan, allowing Indian goods a needed route to access the Asian interior.

For Iran, this increased interest means the possibility of a reviving years of stagnant FDI and little growth in its free zones. The country has hosted several conferences on free zone investment, including one in Chabahar in May 2016, and hopes that foreign delegations from India, the European Union, the Far East, and the Gulf will continue to arrive regularly.

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